Modern Healthcare – To build or not to build? Micro-hospitals gaining favor with health systems amid shift to ambulatory care

By Alex Kacik | February 17, 2018

Christus Health recently opened a micro-hospital in Shreveport-Bossier, La. Tennova Healthcare’s flagship Physician Regional Hospital in North Knoxville, Tenn., was in desperate need of an overhaul, and its then-owner, Health Management Associates, in 2013 decided to upgrade with a $304 million replacement.

In 2015, HMA’s new owner, Community Health Systems, acquired a  109- acre plot for the new hospital that would be closer to higher-income suburbs, about 8 miles west of Physician Regional.

According to executives overseeing the expansion, they envisioned a 272-bed hospital that “incorporates the constantly changing care delivery models” and “meets the needs of its patients well into the future,” while at the same time reducing the footprint of the current 1 million-square-foot behemoth built  in 1930.

But plans have changed, and so has the industry.

In January, Tennova scrapped its goal of building a new hospital and pivoted to an ambulatory-focused strategy as it consolidates inpatient operations.

The move mirrors a strategic shift that is taking place across the country. Smaller hospitals are scaling down and stripping services while larger systems are doubling down on their outpatient facilities.

Inpatient admissions continue to soften for most systems as more care is directed to cheaper and more convenient settings. Meanwhile, a greater portion of health systems’ revenue is coming from ambulatory operations.

Capital planning discussions are more strategic and  contentious  than  they have ever been, said Thad Kresho, U.S. health services deals leader for PricewaterhouseCoopers. A lot rides on the debates involving whether to build    a new hospital or additional outpatient facilities or merge with a system that already has the infrastructure, he said.

“Those discussions are happening a lot—’Where do we employ capital in the right way to satisfy heavier performance and quality scores; do we get a specialty group involved?’?” Kresho said. “Boards are questioning why they should build or refurbish a new hospital when you are trying to  keep people out of it, so why build the ‘Taj Mahal’ of hospitals?”

The entire concept of a hospital is shifting. The idea of a 100-plus bed hospital with double and triple rooms no longer aligns with currentexpectations of privacy and shorter stays, not to mention the financial incentives to get patients out of the hospital quicker.

Tennova’s approach is to consolidate the majority of its Knoxville-area acute inpatient services while exploring opportunities to develop more free-standing emergency centers, ambulatory surgery centers and physician offices.

Healthcare industry dynamics have shifted considerably since Tennova began planning the replacement hospital, said Tony Benton, CEO of Tennova’s Knoxville metro market.

“We’ve determined the best use of our capital in Knoxville is to invest in strengthening services at our existing hospitals and to develop a more robust network of access points and outpatient services,” Benton said in a  statement  to Modern Healthcare, provided in lieu of a phone conversation.

CHS has been trying to dig itself out of a financial hole spurred by its HMA acquisition.

Getting small

Across the country, more health  systems  are  developing  micro-hospitals, which have fewer inpatient beds to make room for lower-acuity patients, observation and short stays. The cheaper acute-care delivery models can also broaden referral networks and often complement an array of ambulatory services.

While health systems create additional access points, they can also financially benefit by charging facility  fees for these outpatient services, which help pay  for the hospital’s overhead costs.

Dignity Health, in partnership with Emerus, has embraced the micro-hospital mantra. It has four in Nevada that were built over the past two years.

These micro-hospitals now handle 21% of Dignity’s total emergency room volume in Nevada, and less than 6% of its patients require transfer to a higher level of care.

It has used the micro-, or “neighborhood,” hospitals to complement its three hospitals in the Las Vegas area, where there was steady demand  for emergency care and short stays. As Dignity took on more  risk  through Medicare bundles and other value-based models, it recognized the need for a broader presence in the community, said Peggy Sanborn, Dignity’s vice president of partnership integration.

“We believe that neighborhood hospitals make sense as a broader network, where patients can also connect to specialists,” she said. “They don’t make sense as sole solutions.”

That is where there has been some friction with CMS regulations. The regulations mandate that the micro-hospitals be primarily engaged in inpatient care—they can’t just have one bed and the rest is an emergency department, said Lyndean Brick, founder and CEO of the consultancy Advis Group.

But as long as providers follow the rules, micro-hospitals could replace many bulked-up hospitals that will have to be repurposed, she said.

“I really see micro-hospitals as a way to change the cost curve,” Brick said. “We’ll be left with a lot of edifices that we have figure out what to do with— assisted living, retirement homes—turn them into something else.”

Christus Health’s Louisiana and Texas division has spent most of its capital budget on the ambulatory side, said Stephen Wright, the system’s senior vice

president of group operations. It opened a micro-hospital in the Beaumont, Texas, area that has an ER, full-service radiology department, wound care, therapy as well as a few inpatient beds.

It has helped rebuild relations with physicians in that market by providing services they need for their individual practices, Wright said.

“One of  things we  are trying to  do  is  create access points for our ministries,  as many as we can create, and do it in such a way that we can keep the cost       of  healthcare down by  setting up  ambulatory centers in  underserved areas,”  he said.

Christus Health’s micro-hospital includes a full-service ER, a full complement  of radiology services and capacity for 11 inpatient beds.

Christus recently opened a micro-hospital in Bossier, La., with a full-service ER, radiology services and capacity for 11 inpatient beds.

Health systems like Christus and Vanderbilt University Medical Center have also converted under-utilized retail space into outpatient hubs.

“It doesn’t make sense in today’s environment to build multiple  hospitals  in close proximity to each other,” Wright said. “Most communities today are over- bedded. It’s a more effective use of resources to build a smaller footprint via ambulatory facilities and  then transferring them to other local facilities if  there  is a need.”

Office space

The growing demand for ambulatory space has reduced medical office vacancy rates across the U.S.

The medical office market has seen the average vacancy rate drop from around 17% to 13% over an eight-year span, according to commercial real estate firm CBRE. In 24 of the past 29 quarters, demand has outpaced new supply.

Demand will continue to grow,  said Jim  Hayden, executive managing director of healthcare, global and workplace solutions at CBRE. “Medical providers are willing to sign long-term leases for locations  near  large  patient  populations and buildings that are well-equipped to offer specialized services like dialysis centers or ambulatory surgery centers,” he said. “Providers looking to reduce

costs and make their services more easily accessible to  patients will also shift  to lower-cost settings like retail centers.”

Health systems will also continue to invest in urgent-care centers. An Urgent Care Association of America white paper reported that ER  visits  were reduced by 30% in communities where there was access to walk-in, no- appointment medical services via urgent-care centers. Also, the cost to care  for the same diagnoses in ERs was 10 times higher compared to the urgent- care centers, according to the paper.

Given these factors, the $18 billion urgent-care industry is expected to continue to grow 5.8% in 2018.

Bucking the trend

Oklahoma University Medicine is sticking with its plans to build a $363 million patient tower at OU Medical Center, which is expected to open in the second quarter of 2020 after about a decade in the pipeline. Contrary to many other providers that have too many beds, the Oklahoma City hospital has operated   at about 90% occupancy for about four years, executives said. The academic medical center also needs to update its perioperative capacity and other facilities, similar to other systems looking to upgrade worn infrastructure.

Executives said there is high demand for cancer care, and OU sees the opportunity to attract patients who had sought oncology services elsewhere.  The academic medical center aims to build out its neurological services, bone marrow transplant operations, cardiovascular lines, trauma care and other higher-end services. It will also bolster their physician training programs.

Part of the demand stems from rural and community hospitals that are paring down their services as margins thin, said Kris Wallace, president  of  OU Medical Center.

Kris Wallace


OU Medical Center

“There is continuing demand as we see an increasing number of transfers to ICU-level care, which is not available 24/7 in some of the other facilities,” she said.

While OU has expanded its outpatient imaging sites for breast screenings and added telemedicine touch points, it wouldn’t make sense to continue to

increase access points via ambulatory facilities if it didn’t have any additional inpatient capacity, executives said.

The project will add 32 new operating rooms and 144 patient beds and OU Medicine aims to hire 100 more employees by year-end to supplement the 200 it has already added.

The beds can be used either for the ICU or medical-surgical services. They will allow the organization to seamlessly transition between short-term and long-term use, allowing patients to stay in the same room and ideally improving care delivery and patient satisfaction, executives said.

The new tower and pediatric expansion will consume about  70%  of  the medical center’s five-year capital spending budget. “We have a great need to grow the number of physicians in our state,” said Charles Spicer, CEO of OU Medicine.

Rendering of the OU Medical Center patient tower

A seismic shift

A number of California hospitals are allocating much of their capital spending budget for either

renovating or replacing aging facilities to comply with earthquake safety standards. Los Angeles-based Pacific Alliance Medical Center shut itsdoors  in December, citing the massive costs of retrofitting its facilities  to  meet seismic requirements as one of the reasons.

PAMC said its hospital building does not meet current California seismic standards and it is not “economically viable for us to  invest  nearly  $100 million to build a hospital on land that we  would not  own,” the company said in a statement.

Another California operation, Sutter Health, is investing significantly in its Alta Bates Summit Medical Center and California Pacific Medical Center to meet California’s seismic safety guidelines. The Sacramento-based not-for-profit system also opted to replace its Eden Medical Center, Mills-Peninsula Medical Center, Sutter Medical Center and Sutter Santa Rosa Regional Hospital rather than retrofit them.

But this can put health systems in an unenviable position as they allocate major swaths of their capital spending budget to inpatient facilities while payers, consumers and new policies push for less care in these costly and

often inconvenient settings.

“The question becomes, maybe they can’t be everything to everybody and maybe they have to reduce their footprint,” Brick said.

Tags: Capital ExpendituresFinanceHealthcare EconomicsProviders

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